IBM second-quarter earnings rise but revenues slide, raising questions about where IBM will find next waves of growth. Some cloud, big data and Watson numbers stay hidden.
IBM focuses like a laser beam on delivering consistent earnings, and the company didn't disappoint on Wednesday when it reported financial results for the second quarter ended in June. What it didn't manage to do was clear up uncertainties about the company's future growth engines, as IT spending continues to shift toward cloud computing and away from important categories for IBM.
For the three months ended June 30, IBM reported a year-over-year revenue decline of 3% to $24.9 billion. Nevertheless, the company managed to ring up an 8% non-GAAP increase in quarterly earnings. It even raised revenue expectations for the full year by 20 cents.
At first blush, the earnings figures were pleasing to investors, but "all in" data calculated based on generally accepted accounting practices included a $1 billion "workforce rebalancing" charge that sent quarterly earnings per share down 13% year over year.
Workforce rebalancing is a euphemism for layoffs pursued most aggressively in Europe and also in declining pockets of IBM's services, hardware and software businesses. IBM does this sort of rebalancing every year, but it packed this year's moves all into one quarter after reporting disappointing first quarter results .
IBM does a great job of financial engineering and taking "tough-minded action," as CFO and senior VP Mark Loughridge put it during a conference call with financial analysts. But taking measures to ensure profitability can't hide anemic growth in some segments and fairly dramatic declines in others.
The brightest spots in IBM's 2Q performance included a 5% increase in software revenues, a 9% increase in middleware revenue and an 11% increase in mainframe revenue (all figures in constant currencies). The biggest disappointments were in hardware, where Power Server and Storage unit declines dragged Systems & Technology revenues down 11%, despite the gains in the mainframe business.
Power revenues were down 24%, despite the fact that IBM introduced a range of new Power 7+ servers this year. Oracle and HP, too, are having trouble moving these high-end servers. This is one area where market moves toward cloud-based apps and away from packaged apps running on Unix servers have turned into a real drag on IBM's earnings.
IBM is also trying to sell its low-margin X86 server business, but talks on a deal with Lenovo reportedly broke off in May. IBM now says it doesn't anticipate completing what some estimate would be a $5 billion divestiture in fiscal 2013.
IBM's services business (including Global Business Services and Global Technology Services) declined 1% year-over-year in the second quarter. Loughridge noted a healthy backlog of services business and stressed that results improved over the previous quarter. But here, too, you're left wondering where the growth will come from as the mainstream packaged app market moves toward cloud-based services and away from on-premises systems integration and consulting.
IBM absolutely is investing in high-growth and high-margin businesses, and these categories generated the few robust, double-digit figures that the company reported. IBM's cloud business, for example, was up 70% during the first half of the year. This is where IBM recently spent $2 billion to acquire SoftLayer, a privately held cloud computing infrastructure company that had $364 million in revenue in 2012, according to Moody's. Another bright spot was Smarter Planet revenue, which was up 25% during the first six months of the year.
The problem with these sunny figures is that there's no frame of reference, as IBM doesn't break out its cloud or Smarter Planet revenue. Same goes for Watson, which Ginni Rometty , IBM's chairman, president and chief executive officer, recently highlighted as the cornerstone of the company's plans for the coming era of cognitive computing.
What will the future bring as big data changes spending patterns in IBM's all-important information management software category? General Manager Bob Picciano recently told InformationWeek that database, data-integration and mainframe workloads may well be disrupted by emerging platforms such as Hadoop.
There are good reasons why IBM might not want to disclose certain revenue figures. Many of IBM's Smarter Planet and business analytics offerings like Watson, for example, are unique. They're also highly profitable, in part because they're not really subject to competitive RFPs where you can look at comparable solutions. That's all good for IBM and investors, but would-be customers might be less enthusiastic about buying products known to be highly profitable.
The opposite problem is likely behind IBM's reticence to disclose cloud computing revenue, as this is a notoriously low-margin business. InformationWeek has complained about the lack of visibility into IBM's cloud revenue before, and back in 2011 we were told it amounted to "hundreds of millions of dollars." IBM has also said that its cloud revenue will reach $7 billion by the end of 2015.
The point is that IBM's best prospects for growth and its most profitable and promising categories are shrouded in mystery -- financially speaking. They often cut across multiple categories, and the figures that are shared are impossible to reverse-engineer into real insight about IBM's business.
As long as investors keep seeing profits, they may not insist on better reporting. But it's hard to see IBM's future given the absence of quantifiable and robust growth figures.
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